Well-functioning Real Estate Markets

– Criteria and Examples (9076)

Prof. Dr.-Ing. Winrich Voß

Land and Real Estate Management

Geodetic Institute Leibniz University Hannover

FIG Task Force Real Estate Market Studies Presente

d at the FIG

Working W

eek 2017,

May 29 - June 2, 2

017 in Helsinki, F

inland

Motivation / Content

• Task force topic: Reals estate market studies

(describing, learning from each other, collect consistent experiences)

• Well–functioning markets? What is good, what is it not? (Highest prices?)

For whom? which perspective? (public wealth?)

• Relevant indicators

(affordable housing, reliable financing system, land consumption ?)

• Examples

(ownership rate, overburdened households, planning gain)

Importance of real estate markets

• Real estate market is of enormous importance in economy and society

• Relevant for the stability of the financing system

• Big part of private wealth is held here (commercial and residential property)

• Requirement of a ”place to live” (social part, neighborhood)

• Structure and design of towns and villages as cultural good (state/ region)

• Ecological situation is more and more important for property markets

Well-functioning real estate market provides many advantages (private and public)

International Property Markets Scorecard methodology

Center for International Private Enterprise (CIPE) International Real Pro-perty Foundation (IRPF)

Property Market Scorecard System (CIPE / IRPF):

Aim: objectively measuring the effectiveness of property markets

Focus: International property markets.

Connection of property market and

overall economic development

Property market risk assessment

3 levels of aggregation:

6 core elements (1. level)

3 lead indicators each (2. level)

3 measurable sub-indicators each (3. level)

Evaluation at 3. level (54 sub-indicators)

Core element Map of property rights

How to describe a countries real estate market ?

Which indicators are most important ?

When is the market well-functioning - with accepted results?

(satisfying, smoothly, ...)

When is a market not functioning – with unsatisfying results?

Result of a well-functioning real estate market system?

Result of a very strong property right?

No town – No village ! Urban sprawl – inefficient land consumption

Structure to analyse market functioning at operative level

Real Estate Market

Legal Framework

Planning system, property rights, legal

tools, taxes

Functioning Stakeholders (priv. + publ.) adopting framework and market forces

Outcome Market results

Real Estate Market

Legal Framework

Planning system, property rights,

legal tools, taxes

Functioning Stakeholders (priv. + publ.) adopting framework and market forces

Outcome Market results

Aims Policies of econ.

and social development

Aims of land policies

… different aims in different parts of the world

… are necessary to evaluate if a market runs out of functioning

Some are common, some are special in some countries

• Provision of housing: ratio available flats to number of households

• Price level and change of prices: in relation to disposable income

• Tenure structure: increase ownership rate

• Reduce land comsumption (to reuse brownfields before developing new greenfields)

• Sufficient supply, especially in affordable housing

• ……

Indicator: Ownership rate

• Important outcome of a country’s real estate market system !

• Evaluation?: High ownership rate indicates a well-functioning market system?

• Ownership rates are very different (40 – 95 % in OECD-countries)

Source: OECD Social, Employment and Migration Working Papers No. 176 – Policies to promote access to good-quality affordable housing in OECD countries

Indicator: Ownership rate

• Evaluation has to include market for rental dwellings.

• 2 sub-markets with different mechanisms are responsible (enough supply, meeting

different demands)

• Relevant indicator: Ownership rate + rental dwellings (number of flats, rent level, ...)

• Example Germany: Land policy aim: raising ownership rate (no real success)

• Obstacles: high prices, financing system requires equity ratio, keep job mobility

Indicator: Land consumption rate

• In many countries important outcome of planning and real estate market system !

• Different aspects: Ecological: Protecting landscape against urban sprawl

Economical: Using infrastructure efficiently, retaining agricultural land

• Evaluation: Land consumption rate under 30 ha per day (Germany)

Preventing urban sprawl (Switzerland),

Preventing reduction of agricultural land (China)

Example Switzerland:

• Permanent increase in population

• Scarceness of settlement areas

(40% mountainous regions)

• Prevalence of urban sprawl

• Action:

Changing the legal framework

Improve planning law

Quelle: Eidg. Forschungsanstalt für Wald, Schnee und Landschaft WSL, Zürich

Revision of Swiss Town and Country Planning Act (RPG) (Revision 15. Juni 2012, Referendum 03. März 2013)

1. Local development plans (municipalities)

• New settlement areas restricted to needs of next 15 years

• If more, revision of plan within next 5 years

• Re-zoning may cause compensation

2. Planning gain tax (20 % of gain in land value by new zoning)

3. Improving availability of land for housing (new tools)

• Replotting procedure

• Timeframe for house building

Other countries: Preventing urban sprawl not aim of land policy !

Winrich Voss (8447)

Indicator: Affordable housing

• Enough supply in affordable housing big challenge for real estate market systems

• Separated market dominated by state institutions?

• Modern market economies are looking for public-private-partnership solutions

• Evaluation: Overburdened households and share of housing costs

House cost burden (EU 2010)

“Population at risk of poverty”: Income below 60% of median national income

Source: UNECE (2014): Survey on Land Administration Systems, p. 22 http://www.unece.org/fileadmin/DAM/hlm/documents/Publications/survey.land.admin.systems.pdf

Indicator: Planning gain tools

• Are limitations of planning gain necessary as correctives in the market system?

• They are used in many countries in very different models

– New development areas (Switzerland)

– Public monitoring of rents (Switzerland)

– Betterment levy (UK)

– Property tax (Taiwan)

– Planning gain tools in adminstrative procedures (Germany: land reallocation,

urban renewal)

– PPP in urban developement contracts (Germany)

Winrich Voss (8447)

Value un-developed

land

Value developed

land

Value devel. land (net)

Net

valu

e

incre

ase

Cost

and

burd

ens

Gro

ss v

alu

e

incre

ase

Pro

pert

y

valu

e

Value undeveloped

Gross value increase

Net value increase

Affordable housing

Social infrastructure

Provision of services

Land for public services

Economic impact of the Munich Land Strategy

Min. 1/3 of net value increase for developer

Elements of a well-functioning real estate market

• Some key requirements / preconditions

– Secured property rights

– Sophisticated system of land use designation / planning system

– Fair and efficient land and property tax system

– Reliable property financing system

– Monitoring systems of land and property market outcomes

– Significance of property market in governance and administrative structures

– Significance of education and professional skills in land and property aspects

Conclusions

• Aims of land policy are important for the ”well-functioning” of a market and should be

included in evaluations of REMS.

• Some aims are generally accepted, some are specific in different countries.

• Real estate market systems tend to scarceness of supply and hence raising prices.

• Important indicators for well-functioning markets are:

– Supply and demand ratio: Enough and differentiated supply (incl. rental housing)

– Income to property price-/ rent-ratio: Sustainable relation to income level

– Overburdened households

– Planning gain options

– Efficient land use / land consumption

Thank you for your attention!

CONTACT Prof. Dr.-Ing. Winrich Voß Nienburger Straße 1 Land and Real Estate Management D-30167 Hannover Geodetic Institute Tel. +49-511-762-19927 Leibniz University Hannover Fax +49-511-762-19929 GERMANY Email: voss@gih.uni-hannover.de Internet: www.gih.uni-hannover.de